ASIA CREDIT-Calm Japan corporate market enjoys issue deluge

By Rika Otsuka

TOKYO, July 17 (Reuters) - Yield-hungry Japanese portfolio managers have snapped up corporate bonds this year at a robust pace, with debt issuance expected to stay brisk due to low government bond yields and a huge amount of maturing paper.

The year-old credit crisis and Japan's first corporate default in years have not disturbed the market much, illustrating how the country remains a relative oasis of calm away from the turmoil racking U.S. and European credit markets.

Bonds totalling more than 8.3 trillion yen ($79 billion) are maturing this year, according to Thomson Reuters data, and investors are eager to reinvest the proceeds back into the corporate market.

The massive redemptions of corporate debt mostly stem from a record year of offerings in 1998, when even blue-chip companies had difficulty securing loans in the midst of Japan's post-bubble banking crisis.

The buying is helping limit the widening of Japanese corporate credit spreads from the market turmoil abroad that has taken a new turn for the worse with the fears about the health of U.S. mortgage financing giants Fannie Mae and Freddie Mac.

"We have been actively buying corporate bonds with high credit ratings and attractive spreads," said Yukihiro Fujioka, general manager of asset management at Asahi Mutual Life Insurance Co, which manages 6 trillion yen of assets.

"We are likely to pick up more corporate bonds that offer good spreads, as government bond yields are not expected to rise much," Fujioka said.

Asahi Mutual said in April that it would invest around 30 billion yen in corporate debt in the business year ending next March, and Fujioka said the life insurer would have no problem in meeting the investment target.

Thanks to good ratings, regular issuers should be able to sell new paper without much problem.

And while big bond buyers such as banks and insurance companies pick up only debt with credit ratings of single A or higher, they have plenty of money to put to work. Even as credit spreads have widened in Japan as elsewhere, the damage has been limited because most companies have strong credit ratings, are hoarding cash on their balance sheets and are having no trouble finding buyers.

"Spreads are unlikely to keep widening in the medium term," said Koei Takahashi, credit strategist at Nomura Securities. "Global credit worries have little impact on the domestic corporate bond market."

Some 4.86 trillion yen ($46.5 billion) in Japanese corporate bonds were issued in the first half of this year, the fourth highest on record, Thomson Reuters data shows.

Volume in the whole year is expected to come close to last year, when corporate bonds totalling 9.3 trillion yen were sold, the second highest next to a record 12.2 trillion yen in 1998.

LOW RATES SPUR BUYING

One big reason for the brisk corporate bond business is investors' quest for higher returns but desire to stick to a conservative investment stance.

With the Bank of Japan having held overnight rates at 0.5 percent for 17 months and not expected to budge any time soon, yields on 10-year Japanese government bonds JP10YTN=JBTC have fallen to a three-month low of 1.530 percent.

The fall in yields has been driven partly by the Nikkei stock average's .N225 16 percent slump this year that even led to its longest losing run since 1954.

"Investors want to buy corporate bonds to avert risks as credit fears are rising, pushing down share prices," said Hiroshi Uchino, credit analyst at Lehman Brothers in Tokyo.

Many issuers of late have been from stable sectors like utilities and railways.

Tokyo Electric Power Co (TEPCO) (9501.T) sold 50 billion yen of 12-year bonds on Wednesday with a coupon of 1.948 percent coupon, 22 basis points above comparable JGBs and about 5 basis points over yen swaps.

That is narrower than TEPCO's 10-year credit default swap spreads of 30 basis points TKYA10YJPAC=MP, showing solid investor demand for such paper. TEPCO is rated AA by Standard & Poor's and AAA by Japan Credit Rating Agency.

In the Japanese corporate debt market, defaults are rare and the majority of bonds have high ratings.

But real estate firm Suruga Corp 1880.T said last month that it had filed for court protection from creditors, leading to the first debt default in seven years and catching some bond investors off guard.

As a result, investors are shunning bonds from smaller real estate firms and debt with BBB ratings.

From the perspective of bond issuers, though, refinancing funds through the bond market is still favourable as interest rates are low.

"As long as the benchmark 10-year JGB yield stays around the 1.6 percent level, the volume of corporate bond issuance will remain large," said Yutaka Ban, chief credit analyst at Shinko Securities. But that could all change if people start to believe JGB yields will rise steadily towards 2 percent or higher.

Such expectations will prompt conservative Japanese bond investors to shift their money to JGBs, while blue-chip firms are likely to seek bank lending instead of paying higher coupons to bond holders. (Editing by Hugh Lawson)